Many people, professionals and companies are planning to launch an tokenization ICO in the coming years. The venture capital investment funds specialised in Blockchain technology have had a lot to do with it.
An ICO (initial coin offering) is a financing instrument born out of the cryptomoney environment. This is why more and more startups are betting to raise funds in the crowfounding style.
Tokenizing an ICO
In the business world, it is common for a large company, at a certain point of growth, to decide to go public. Then it usually sets in motion a process known in Spanish as a public offering. This is also known as IPO, or initial public offering.
Through an IPO, investors (both large and small) acquire shares in the company in question. The company receives a capital injection and becomes partially or wholly controlled by a multitude of shareholders.
This is the same philosophy behind the ICOs, but redesigned for the cryptomoney and startup environment. The ICOs are one more way to finance themselves, one more method of fundraising.
However, for the moment, their use is hardly regulated. Switzerland is the only country that has established certain guidelines. China says it is working to ban them. The United States and the European Union are studying new regulatory mechanisms. “Startups use ICOs to avoid the usual processes of raising capital through very rigorous and controlled investment funds and banks,” source Investopedia.
Tokenization ICO and shares
The fact that they are not regulated does not mean that ICOs are an unstructured process. When a startup wants to launch one, it usually publishes a document in which it explains what the project is about, its objectives, the money it hopes to raise and the duration of the ICO. During the initial coin offering, the company sells tokens as if they were shares. In return, it receives funds in the form of crypto coins.
Wait a minute, tokens? Wherever we look, the cryptomoney environment is full of new terms. Tokens are basically a unit that is given a specific agreed value. This value can be related to the startup itself, linked to another cryptomone or tied to the value of a service that will offer the startup if the financing process goes well.
Let’s try to put everything in perspective with an example with fictitious data. Imagine if Netflix had been financed with an tokenization ICO in the beginning. For each token purchased, they promised a month’s access to a future subscription to a pioneering streaming video service. At the time, let’s remember, it was a product hard to imagine in the market. Then, at the exchange rate, each token was worth one euro. Now its value would have been multiplied by 10.
Advantages of launching and tokenization ICO
There are many reasons why so many companies are interested in creating an ICO and tokenizing their projects. It was in July 2014, when Ethereum launched the first ICO in history, the total raised through this instrument amounts to more than $12 billion. ICOs are a financing instrument with many advantages.
What is an ICO?
Speed and ease. Any company can start an tokenization ICO through various platforms such as Ethereum or Stellar.
Access to an international and online market. The potential market is formed by all those who have access to the internet. The campaign can be promoted through social networks, specialized websites and forums.
All the decentralization power of blockchain technology. The very peculiarities of blockchain technology (a shared, decentralised and secure network) influence the processes of an initial public offering. As intermediaries are eliminated, the resources needed to complete each transaction are much smaller.
Liquidity. For investors and consumers, one of the major advantages is that crypto currency markets tend to be very liquid. In other words, large sums of capital can usually be acquired in a short period of time.
Democratization of investment. Investors do not have to be part of a select club in order to invest. Access to tokens is public and can be achieved from anywhere in the world.
Great profit potential. The data of our example with Netflix was fictitious, above all, because the profit margins were too low to be an ICO. The price of the popular Bitcoin was 90 euros in June 2013. Right now it’s worth about 3,800, but it surpassed 20,000 by the end of 2017.
Disadvantages and risks of an ICO
It’s not gold all the token that glitters. Almost all the advantages and features we have just reviewed have their dark side as well. These are the risks of an ICO:
Little security for the investors. There is rarely any real evidence of the technology or business the company is developing. In many cases it is nothing more than a project that may or may not work.
Uncertainty about the value of tokens. There is so much expectation about the potential benefits of an tokenization ICO that sometimes the value of the tokens lies more in the potential demand than in the actual product. If such demand does not occur, the value of the token does not grow.
Market volatility. Something that increases its value from 90 to 20,000 and then falls to 3,000 can only be described in one way: volatile. Thus, investments in tokens and crypto currencies require permanent attention.
Ignorance of investors. If not expressly requested, the company that carries out the
tokenization ICO never knows the real identity of the investor. This opens the door for illegal organizations to launder money through the purchase of tokens.
Imminent changes in legality. Each country has adapted the ICOs to its legislation and tokenization ICO . There is hardly any regulatory precedent for this instrument, which does not mean that it is not subject to regulation. On the other hand, following cases such as Switzerland and China, it is expected that in the next two years most countries will opt for sector-specific legislation.
With their advantages and disadvantages, few doubt that, for the time being, ICOs are an upward instrument. 2017 bid farewell with 343 token sales processes. In the first three months of 2018, 202 tokenization ICO had already been completed. In addition, while 20 billion dollars were raised in the whole of last year, these first months of the year already amount to 6 billion dollars.